Reigning Entrepreneur Is Suddenly a HUD Target

Brentwood multimillionaire A. Bruce Rozet was having a hard time understanding why so many officials in the U.S. Department of Housing and Urban Development were saying such nasty things about him.

For nearly 20 years, Rozet’s firm has done large amounts of business with HUD. But now, the agency was attacking the company, threatening to foreclose on two large substandard housing projects in California and banning the firm from doing new business with HUD for one year in Oklahoma and Washington.

“I’m honest. I’m doing the legal thing,� Rozet said in an interview, sitting in his new Santa Monica office, well-tanned and just back from Europe. “Suddenly,� he added, “we find ourselves on the receiving end of a lot of noise.�

While criminal investigators and congressional committees look into theft and political influence at HUD, the troubled housing agency, trying to right itself, has homed in on targets of its own--entrepreneurs who have traded in HUD housing. No one has felt HUD’s heat more than Rozet and the Associated Financial Corp. of which he is chairman.

In Rozet, 61, HUD is taking on perhaps the most prominent and knowledgeable entrepreneur in the field. With nearly two decades of experience, he is viewed as an expert on low-cost housing by leading lawmakers, including Sen. Alan Cranston (D-Calif.). Los Angeles Mayor Tom Bradley has singled out Associated Financial for its low-cost housing expertise.

AFC owns or manages 45,000 units in about 350 housing projects for the poor. Its portfolio is worth an estimated $1 billion, making it one of the largest private owners of HUD-subsidized and HUD-regulated property.

Things Get Worse

The bad publicity for Rozet started in June when HUD Secretary Jack Kemp toured Tyler House, an AFC project of 321 units in Washington, and proclaimed the conditions to be “scandalous.�

Since then, things have only gotten worse.

A week ago, HUD issued one of its most far-reaching sanctions against the firm. It barred AFC for a year from buying or taking over management of any additional apartments in Washington and adjoining counties. HUD took the action after inspectors found leaking sewage and no hot water at the 190-unit Sursum Corda Village in Washington and accused the firm of misusing funds intended for building upkeep.

In July, Charles Ming, the top HUD official in Oklahoma, had taken similar action, barring an AFC subsidiary from doing new business there for a year. HUD seized three of AFC’s six projects in Oklahoma, calling them crime-ridden slums and citing default on mortgage payments.

In California, Robert J. De Monte, HUD’s Western regional director, has begun foreclosure proceedings on Geneva Towers, a 573-unit project in San Francisco in which AFC has an interest. Among the problems at the 20-story twin towers, besides graffiti and drug dealing, were dozens of fire code violations, corrected only after the city brought suit last year. Elevators rarely work, causing tenants to kick doors and walls in frustration, further contributing to the project’s run-down condition, according to the building manager.

De Monte also has requested authority from Washington to seize another AFC project, Ujima Village, in Willowbrook, just south of Watts. Besides being more than $2 million in default on its mortgage, Ujima chronically suffers from broken stairs, falling plaster, leaking roofs and unkempt grounds, according to HUD inspectors. Inspection reports note that tenants regularly endure long delays before repairs are made or worn out household appliances are replaced.

Frank Keating, HUD general counsel, said Kemp is investigating why privately owned projects are having such troubles, and he has created a Troubled Project Task Force that will tackle the most obvious cases first. Four AFC projects--two in Washington and two in Oklahoma--are “at the very top of the task force list,� Keating said.

“Why some (of AFC’s) projects are run very capably and some aren’t, we do not know, but Jack Kemp’s view is that housing for poor persons should not be Beirut after the bombings,� Keating said. “The hot water (at Sursum Corda) was broken for five months and not repaired. You can’t blame that on drug dealers. . . . And Tyler House is an absolute wreck.�

HUD officials say they considered but rejected the most severe action they could take against AFC--permanently barring the firm from doing business with the agency. HUD is not equipped to assume management of AFC’s projects, and agency officials say that many are running well.

“Some properties that are managed by AFC are operating efficiently and effectively,� De Monte said in an interview. “For HUD to take extreme actions that would jeopardize those properties would not be smart.� Rather, he said, he prefers “the water-torture technique,� taking action against troubled projects one by one.

In interviews, Rozet maintained that AFC’s problem projects are isolated. He vowed to fight the action against AFC in Washington, and charged that it is “clearly a continuation of the harassment of us, in keeping with Jack Kemp’s pronouncement that he is going to make it difficult for us to do business.�

Rozet places the blame for problems at projects such as Geneva Towers on partners over whom he had no control. At other troubled projects, such as Tyler House, Rozet said, HUD has refused to fund renovations.

He said the HUD money that might have gone toward upkeep at needy projects went instead to political friends of the previous HUD administration run by Samuel R. Pierce Jr. And, Rozet said, many of the projects deteriorated after the onslaught of crack cocaine.

He insists that his one overriding goal is to provide decent housing for poor people.

“In effect,� Rozet said, “I am on De Monte’s side. . . . Bob doesn’t understand where I’m coming from. Maybe someday he will.�

AFC’s rough handling by HUD under Kemp contrasts sharply with the treatment it received during the previous eight years. During that time, AFC and its subsidiaries bought up hundreds of HUD projects and gained millions in HUD subsidies though grants, low-interest loans and forgiven debts.

In those years, Rozet’s prestige grew. He was frequently called to testify in Congress as a housing expert, and “is from my experience one of the few most knowledgeable people about public policy (affecting housing for the poor),� said Donald Campbell, chief staff member on the Senate housing subcommittee.

Jesse Jackson tapped him for his California presidential campaign committee last year and Rozet proved an effective fund-raiser in Jackson’s bid for the Democratic nomination.

Rozet’s prestige also extends to his own back yard. Mayor Bradley, speaking at gatherings in April and May, urged corporate leaders to finance badly needed low-cost housing. AFC was one of two firms the mayor said could put together such deals, according to a banker who attended.

Bradley made the recommendation after a visit from former City Councilman David Cunningham. Cunningham, senior vice president of a firm owned by Stephen D. Moses, a long-time associate of Rozet’s, told The Times that he and Moses asked Bradley to encourage corporate investors to put money into low-cost housing.

A spokeswoman for the mayor said Bradley does not know Rozet but had been informed that AFC could help local corporations invest in housing for the poor, an issue in which Bradley has been taking increasing interest.

Past Troubles

Despite plaudits from elected officials and the problems with HUD that have surfaced only recently, Rozet’s past is not trouble-free. The HUD inspector general paid particular attention to his firms in the late 1970s and early ‘80s. At the time, agents were trying to decipher what they believed was an effort by syndicators of HUD property to profit by flipping and trading housing projects among one another. The agents drew up a wall-sized chart with the names of people and companies involved in HUD property sales. At the top was Rozet.

“We thought it was part of a major scheme,� said a top investigator, who has since left the agency and spoke on condition that he not be identified. “They were slick. They were well-heeled. They were well-protected. We could never prove it (any fraud against HUD).�

AFC lawyer Donald Spiegelman bristles at the accusation.

“There isn’t an iota of fact,� he said in an interview. “That some guy making $20,000 a year with the imagination of an ant wants to make a charge is of no interest to me. . . . What’s he doing for housing, sitting there behind his badge throwing darts?�

Spiegelman maintains that as Congress continues to investigate HUD, the agency is trying to shift blame away from itself and onto private owners such as those in AFC “because they’re rich and they’re landlords.�

As Rozet tells it, he fills a niche. Few businessmen get involved in his specialty--privately owned but HUD subsidized and regulated housing projects, many of them troubled.

“If somebody would like to step up to do this,� Rozet said, “we would be delighted to see it. We are not trying to be exclusive.�

The business of Associated Financial Corp. is varied. One enterprise is to buy housing projects through syndication. The firm finds investors and forms limited partnerships that buy the projects as tax shelters. Tax laws allow investors to put money into housing for the poor and take full tax credits, meaning off-the-top reductions of taxes owed.

AFC also acts as a consultant in structuring deals for other syndicators. Additionally, the AFC subsidiary, Housing Resources Management, is property manager of about 100 HUD projects.

Risky Investment

In statements to prospective investors, AFC says the return in tax savings can be high, 18.5% or more of an investment under current law. But the investment is risky. Investors face fat tax bills if HUD steps in and forecloses, either because of nonpayment of mortgages or failure to maintain proper upkeep. AFC recently disclosed in a prospectus to investors that one in 10 of its partnerships had fallen into bankruptcy or run into other difficulty.

For its services, the firm charges hefty fees. A General Accounting Office report on fees charged by 19 firms involved in syndication of HUD property said that AFC takes 33% of the money it collects from investors when pooling funds to purchase a project--more than all but one of the companies surveyed and above the 26.5% average fee charged by syndicators.

Kemp has proposed some controls on the profits reaped by syndicators. As the law stands, HUD has no method of regulating the profit margins of private operators who deal in HUD property.

“There is a place for profit-making owners,� De Monte said, noting that nonprofit entities have run many a HUD project into the ground. “Profit is not a dirty word. But you have to pay more attention to how they make their profits and how significant their profits are.�

Rozet first became involved in low-income housing in 1972 when he formed a company, Income Equities Fund, in Los Angeles. In 1977, he ran afoul of the Securities and Exchange Commission. The SEC sued, alleging that Income Equities made false statements to investors in its housing syndication deals. Rozet settled the suit by admitting no wrongdoing, but agreeing to abide by a lifetime ban on acting as a securities broker-dealer.

Rozet re-emerged in the 1980s. And despite Reagan Administration cuts in the housing budget and changes in tax law that forced many syndicators out of low-income housing, Rozet fared well. In 1987, he bought a home in Brentwood. Valued at upward of $5 million, the house has a remote-controlled back-yard waterfall and a master bedroom that takes up an entire floor. In its July issue, Los Angeles Magazine featured the home, calling it the epitome of interior designer Waldo Fernandez’s work. At the family’s request, a source at the magazine said, the article did not mention Rozet’s line of work.

The early and mid-1980s were especially bullish for Associated Financial and its affiliates. “Rozet hired a huge group of agents, even in Alaska, to comb the country and find housing projects� to buy, a former employee said.

Buying up projects, sometimes dozens at a time, the Southern California entrepreneurs convinced HUD officials that the investment capital they commanded would mean improved living conditions for the thousands of tenants involved.

“These guys are very smart and very creative and very aggressive. Working within a federal bureaucracy that doesn’t have the same expertise, generally they win,� said Thomas Demery, assistant secretary for housing from 1986 to 1988.

Without AFC, Demery said, HUD would have been forced to take over the projects and that would have been costly. So the agency agreed to the deals, often committing itself to increased rents and management fees, or loans.

“The alternative is to let these things go down the drain,� Demery said. “They would come to HUD and say, ‘You may not like this deal, but it is a deal that is better than the alternative,’ and they were right.�

One of AFC’s main investor finders was Charles Bazarian, 51. Bazarian, a one-time nightclub owner, got into the HUD housing business after a 1978 federal insurance fraud conviction in his adopted hometown of Oklahoma City.

Rozet met Bazarian through Rozet’s associate, Stephen Moses. Moses had been in Oklahoma buying projects when a HUD official introduced him to Bazarian, Moses said. At the time, Moses said, he was not aware of Bazarian’s criminal record and assumed he was a legitimate businessman, given the introduction from HUD.

Bazarian’s relationship with the Californians soon blossomed. He traversed the country locating financially troubled housing projects that Rozet’s firm could buy. In the process, he gained wide access to top HUD officials. The HUD inspector general suspected that Bazarian’s access was too good, and opened an investigation to determine whether he improperly influenced HUD officials.

The investigation ended in 1982 with no charges. But with his reputation tarnished, Bazarian gave up working as a finder. But he soon found a more lucrative line. In 1983, he created a loan brokerage firm, CB Financial Corp., and began loaning money to real estate syndicators to finance acquisitions.

AFC was one of Bazarian’s main clients, obtaining as much as $40 million in loans, Sigmund Kohnen, president of CB Financial from 1983 until 1986 and a former lawyer for Rozet, told The Times.

Bazarian’s empire was on shaky ground, and his firm collapsed in 1987 with $133 million in debt, according to its bankruptcy in Oklahoma City. Bazarian’s troubles have not ended. In September, he pleaded guilty to federal charges of skimming $97,000 from two HUD projects in Oklahoma--including one that is in AFC’s inventory. AFC was not accused of wrongdoing.

Pleaded Guilty

Bazarian also pleaded guilty to fraud in obtaining $9 million in loans from two Orange County thrifts--Consolidated Savings Banks and American Diversified Savings Bank. As collateral, the charges said, he used promissory notes from an AFC subsidiary. In pleading guilty, he admitted knowing that the notes were “virtually worthless.� Again, AFC was not accused of complicity.

“I knew the guy enough to know that he was involved in doing some things, but we never gave him false paper,� Rozet said.

That AFC was associated with Bazarian is not a fact widely known among officials who call upon Rozet for his advice in the field of low-cost housing for the poor.

Sen. Cranston, for one, explained: “We don’t have any way of checking up on everybody who comes in.� Cranston and Sen. Alfonse M. D’Amato (R-N.Y.) are carrying legislation that Cranston described as the Senate’s main HUD reform package this year. Rozet served on a committee that recommended the contents of the bill.

Cranston has been the main beneficiary of AFC’s campaign donations. Rozet and Deane Earl Ross, who each own one-third of AFC, raised almost $20,000 for Cranston’s 1986 reelection campaign. Rozet and Ross gave another $10,000 to one of Cranston’s political action committees last year. Others associated with AFC, including Louis A. Cicalese, a Philadelphia lawyer who owns the remaining third of AFC, have given lesser amounts to Cranston.

“I have supported Alan Cranston for 20 years,� Rozet said. Cranston has been open to his suggestions, Rozet added. “What is important is to have input into the legislative process.�

Toward that end, Rozet was especially active in Washington in 1986, when Congress took on tax reform. The tax code revision eliminated many deductions, including one that allowed write-offs for investments in housing for low-income people.

Rozet worked hard for the alternative--housing tax credits. HUD leadership, tenants’ advocates and elected officials in both parties support the concept of housing tax credits. One of the few tax shelters left, housing tax credits ensure that investors will continue to pump money into low-income housing.

The law creating housing tax credits is due to expire in 1990. Senate Majority Leader George J. Mitchell (D-Me.) and Sen. John C. Danforth (R-Mo.) are carrying widely supported legislation to extend the housing tax credits indefinitely. Rozet served on the committee appointed by Mitchell and Danforth that issued a report in January recommending the shape of the legislation.

Syndication was easier under the old tax code, when wealthy investors could reap 100% return on their money over the life of the investment. But while the tax law revision ended the high-flying days for AFC, and many HUD syndicators, AFC retains a portfolio of 350 projects. One way it can profit is to sell the properties. And that is what AFC is trying to do with Ujima Village, the troubled project south of Watts.

If the sale goes through, Ujima will have gone full circle, from nonprofit ownership to for-profit ownership and back again.

Like many projects now held by AFC, Ujima’s construction was sponsored by a nonprofit corporation intent on housing the poor. HUD insured the mortgage. The townhouse development opened with great fanfare in 1973. As envisioned, low-income people would be living there in safe, suburban-like surroundings.

By the early 1980s, however, the nonprofit corporation had fallen $2 million behind in its mortgage. In 1982, Ujima became one of a block of 66 projects, all in rough neighborhoods or in financial trouble, that were bought by Stephen D. Moses, the housing investor who recently served as the go-between for AFC and Mayor Bradley.

“It needed normal renovations that weren’t being done . . . but it was not a horrible environment,� Moses recalled. Moses planned to use the proceeds from syndication to upgrade the project. But in 1984, Moses sold Ujima to another HUD syndicator, who in turn sold it to AFC in 1985. Shortly afterward, AFC’s subsidiary, Housing Resources, took over the daily management.

All the while, as ownership changed hands, HUD records show that conditions in the project deteriorated. Previously, Ujima was “really nice,� recalled one tenant leader. But the 300-unit complex began sliding into disrepair.

To help pay for much-needed upkeep, HUD granted several rent hikes. But while rent for a one-bedroom apartment went from $270 monthly to $408 between 1984 and 1987, HUD inspectors on annual visits to Ujima rated its maintenance “unsatisfactory� in 1986, 1987 and 1989.

Besides the run-down condition of the buildings, HUD called for repairs to deteriorating carports, driveways and yards where barren patches of dirt had replaced swings sets and grass.

“The owners have not made a capital contribution in three years to meet the financial and physical needs of the project,� Benjamin F. Bobo, HUD’s manager in Los Angeles, wrote earlier this year in his foreclosure recommendation.

Rozet and Moses say much of the deterioration occurred after crack cocaine dealers overwhelmed the project and AFC was forced to pour available resources into security. In addition, previous management companies had put off routine maintenance, creating problems that he inherited, Rozet said.

Rozet said he doubts HUD will foreclose on the project and, for all its tough talk, the agency has limited leverage. In order to seize Ujima, HUD by law must produce more rental subsidy money. The well for such subsidies is dry, says regional HUD director De Monte.

As HUD officials in Washington conduct a closed-door debate on whether to foreclose on Ujima Village, AFC has proposed another in several plans over the years to upgrade the project and save it from government seizure, all requiring major federal bailouts.

Rozet is now asking HUD to forgive an $800,000 debt. AFC also wants HUD to support its application for a rehabilitation loan of $2 million from the state of California. If HUD forgives the debt and AFC gets the loan, the firm will sell Ujima to a nonprofit corporation.

Rozet is convinced that HUD will come around to his view. In the end, he predicted: “Ujima will in fact be a banner project and you and I can go to the ribbon-cutting. . . . It will be an example of what can be done in South-Central to curing (drug) trafficking.�

Times staff writers Henry Weinstein, Robert L. Jackson and Douglas Frantz contributed to this article.